Friday, October 16, 2009

Testing our mettle

It gobbles up one-fifth of Victoria's electricity and has cost taxpayers billions of dollars in subsidies. Now its producer is pressing for more public dollars to shield it from the Rudd Government's emissions trading scheme and the global financial crisis. It may be a lightweight metal, but aluminium exacts a heavy toll.

Thirty years after Liberal and Labor state governments went to great lengths to accommodate US giant Alcoa and make Victoria a major producer of the silvery-grey metal, the climate has changed in more ways than one.

In 1979, an aluminium plant in Portland, with a voracious energy appetite, seemed a perfect fit for a state crying out for investment and regional jobs. Victoria's primary competitive advantage was a surplus of cheap, accessible brown coal.

Now the perfect fit looks anything but, with a perfect storm of economic and environmental crises, the onset of carbon pricing and angst over subsidies for a product described by some as congealed electricity raising doubts about Alcoa's future here.

The industry says that without more protection, the Federal Government's emissions trading policy will drive its business offshore and into the arms of countries with little carbon conscience.

Critics in political, business and environmental circles say the company is bluffing. They are now asking a question unthinkable even 10 years ago: can we afford our No. 1 export?

At a waterside cafe in Portland this question brings a frown to the face of self-employed carpenter Peter Reefman. He moved to the state's far south-west as a child in the early 1980s. His father, a builder, was drawn here by the idea of a country lifestyle made possible by the work that would flow from the proposed aluminium smelter.

Indeed, Alcoa is so enmeshed in the regional economy it is difficult to imagine life without it. As the district's biggest industry and ratepayer, Alcoa says it directly employs 600 and generates work for another 200 contractors and thousands more indirectly. The company's older smelter at Point Henry employs a similar number around Geelong.

But Reefman is also an environmental activist and convener of the Portland Sustainability Group. He is well aware of the controversy around Alcoa's contribution to Victoria's greenhouse emissions.

Enough energy is used by the two smelters to power half of Melbourne's homes. Enough is lost in transmission to Portland to power the town as well as the smelter. And almost all of that electricity is generated from brown coal, the most greenhouse-intensive of the world's major energy sources. If the smelters were to close, Victoria's emissions would plunge faster than even the most fervent environmentalist would dare dream.

''Sometimes I wish I could remove myself and look at it all objectively,'' says Reefman. ''It's too hard to see it clearly from here.''

His dilemma is the local version of Prime Minister Kevin Rudd's and Premier John Brumby's as they grapple with the diabolical policy puzzle of slashing carbon emissions without trashing jobs. Especially regional ones.

On a wintry night, the beachside road south of Portland is reminiscent of the wilder stretches of the Irish coast. That is, until an orange-lit vision of concrete and barbed wire emerges from the drizzle. It looks like something out of James Bond. It is Alcoa's 24/7, year-round smelting plant.

The soundtrack is the crackling from the two monster transmission circuits that feed it with power from Latrobe Valley, 500 kilometres away. It says much about Alcoa's community standing that locals tolerate and even celebrate the lines that cut a swathe through farm and grasslands across the breadth of western Victoria. (By contrast, the windfarms built and proposed to take advantage of the coastal southerlies have met strong resistance.)

Portland Aluminium (the local Alcoa subsidiary) is also widely viewed as a generous contributor to local services and the community. Even Peter Reefman's sustainability group's website lists it as a ''partner and sponsor'', in recognition of its funding of environmental books for the Glenelg library.

''There's not too many you'd talk to in Portland who'd have a bad word to say about Alcoa,'' he observes.

Certainly local Mayor Geoff White, a developer, has none. He has done well personally out of the company, selling it land for development back in the early 1980s after a ''very attractive offer''.

He is now negotiating a new friendly deal on Alcoa's rate bill and lobbying to keep the smelter open, whatever the cost. ''They're great corporate citizens, and good environmentally too,'' he says pointing towards the smelter from the mayoral office overlooking Portland dock.

From Treasurer John Lenders' office in Spring Street, the view of Portland is somewhat different. Jobs are a crucial concern but Government insiders confirm that their cost to the public purse is weighing on the minds of ministers. The question of the company's future is certainly being discussed - albeit behind ministerial hands, and closed doors.

When Dick Hamer's Liberal government chose Portland as the site of Alcoa's second Victorian smelter in 1979, it cited the deep-water port and regional jobs as the rationale. Closer to the truth was that state development and former energy minister Digby Crozier insisted the smelter be located at Portland, which happened to be in his electorate.

The government agreed to foot the initial bill for the transmission lines from Geelong at an estimated cost of $160 million, about $700 million in today's money.

But as work got under way on the Portland project, and John Cain's ALP took the reins of government in 1982, Alcoa announced it could not afford Portland due to rising electricity prices. Having been out of office 27 years, the last thing the ALP wanted was a big business such as Alcoa closing up shop before it had even opened.

Victoria had coal to burn and had to pay for an embarrassing cost blow-out in its new Loy Yang power station. The State Electricity Commission of Victoria needed customers, and the global aluminium giant knew exactly how to play its cards. In 1984, the government entered a partnership with Alcoa, signing long-term contracts that locked in discounted electricity prices for Portland (until 2016) and at Point Henry (2014).

The tariff was flexible and pegged to the world aluminium price. The government clearly expected the aluminium price to climb. And so it did, for a short period.

But in the late 1980s the price collapsed and remained low for more than 15 years as new players from Asia, Europe and South America entered and saturated the market.

The mid-2000s resources boom pushed aluminium to a brief new high but the current global financial crisis dragged it back to the depths. Rather than expand, as Alcoa flagged in 2004-05, the company has cut production by 15 per cent in the past year.

The original Alcoa deal was the decision of another era, before competition policy, privatisation, micro-economic reform and, especially, concern about climate change. No one doubts that John Cain was in a difficult position and meant well.

Both sides of politics are sensitive about their roles in the Portland saga, which looks set to cost Victorian taxpayers as much as $4.5 billion by 2016. Alcoa has been back to Spring Street in recent weeks to talk about emissions and electricity and money.

So too has it been busy in Canberra as Kevin Rudd and Opposition Leader Malcolm Turnbull attempt to finalise an Australian scheme to rein in carbon emissions. In fact, the aluminium industry has been busy on this issue for many years.

It is often assumed that the coal industry was the dominant influence on former prime minister John Howard's

carbon-sceptical environment policy. Yet a former senior Liberal insider insists it was the aluminium lobby that was the main player in ensuring John Howard did not introduce an emissions trading scheme.

''There's no better lobbyists than the aluminium industry. They were the opposition to action on climate change, full stop,'' says the source who witnessed the lobbying up close.

Now the industry says it backs Labor's carbon pollution reduction scheme, but only if it does not affect its international competitiveness.

Under the scheme as it stands, aluminium fares much better than was proposed by Professor Ross Garnaut, the Government's erstwhile adviser on such matters.

A study by economists RiskMetrics for the Australian Conservation Foundation found Labor's compensation plan to be the largest short-term industry assistance package in Australian history: $12.5 billion in the form of free carbon permits and other measures, including $1.71 billion to Alcoa. But the aluminium industry wants more. As it has done before, Alcoa is wielding the multinational's trump card: give us what we want or our business will go elsewhere.

The company says it accepts the science of climate change, with corporate affairs and carbon strategy manager Tim McAuliffe insisting that, ''honestly'', Alcoa is committed to minimising its carbon footprint. He points to a 35 per cent global reduction in emissions from its smelters and refineries since 1990. Internationally, emissions per tonne of aluminium were cut by 80 per cent between 1990 and 2006.

The industry's carbon problem, however, does not come from its own operations: just 10 per cent of aluminium's greenhouse emissions are from the smelters themselves. Aluminium's real contribution to emissions is through the consumption of the electricity that also chews up more than 20 per cent of its budget.

In the first instance, electricity generators will be required to pay for permits to cover their emissions from Latrobe Valley.

Alcoa says the power generators will pass on their carbon costs to customers, of which Alcoa is the biggest. These costs will be particularly onerous in Victoria because of its reliance on greenhouse-intensive brown coal.

Under the Rudd scheme, says the company, the cost of doing business in Victoria will rise by $50 million a year. And it wants taxpayers to pick up the tab.

''The implications for Portland are horrible [without the extra compensation],'' says McAuliffe. ''All this could be make or break for these fellows here [in Portland]. You can't absorb $30 or $40 or $50 million a year when your [international] competitors aren't paying it.''

The threat of business going offshore is more loaded now than in the past, when only investment and jobs were at stake. McAuliffe says it is likely that some of Australia's aluminium trade will move to less regulated countries. This would be a double whammy: loss of jobs, and a net increase in emissions, or what is known as carbon leakage.

The carbon leakage argument is also used by the Australian Workers Union in its campaign to have aluminium partially exempted from Rudd's emissions trading scheme.

On behalf of the union, consultants Per Capita calculated the economic and social benefits of aluminium smelting and refining jobs against their environmental costs. The union used the report last year to argue that the industry's 15,000 jobs were worth $1.1 billion to local communities and would be lost to countries with weaker environmental policies.

However, the carbon leakage thesis has been widely criticised and is not borne out in the European Union, which introduced emissions trading in 2005.

Since then, not one smelter has closed in Europe. Alcoa pulled out of one plant in Italy, which has since reopened under new owners.

Last year the International Energy Agency - the IMF of the energy world - reported that the European scheme had ''not so far triggered observable carbon leakage'' for industries including aluminium.

IN AUSTRALIA, environmental research centre the Climate Institute says that through its 90 per cent reliance on coal-fired electricity, Australian aluminium is among the most greenhouse-intensive in the world - Victoria's even more so because it is the only major producer of aluminium reliant on brown coal.

Elsewhere, the industry makes much greater use of renewables, especially hydro. Africa now boasts the most efficient new smelters. ''If you shift production just about anywhere in the world the chances are you will reduce carbon emissions,'' says institute policy and research director Erwin Jackson.

Among those who want change to the Government's attitude to aluminium at the state level is former Victorian sustainability commissioner Ian McPhail. While he stops short of calling for the tearing up of existing electricity contracts, he says it is time to recognise that the taxpayer-supported power is a ''perverse'' subsidy that belongs to a bygone era.

The state's main green lobby, Environment Victoria, wants the Government to conduct a detailed assessment of Alcoa's contracts and scrap them if they are no longer in the public interest.

''The aluminium industry has fought every effort to tackle climate change,'' campaigns director Mark Wakeham says. ''It fought ratification of Kyoto. It fought renewable energy targets. And they're fighting to be exempted from the carbon pollution reduction scheme. They're a very big part of the problem.''

Such sentiment raises tricky questions for the ALP and its cousins in the trade unions. Aluminium is not a labour-intensive industry and arguably governments could get more employment bang for their buck by supporting other enterprises. Renewable energy, for instance.

The aluminium jobs, however, already exist and they are in economically and electorally fragile regional areas. Alcoa has no doubt reminded Labor of the fact.

One ALP elder who knows well the Alcoa issue, says the company is bluffing in its claims about the smelter's viability, noting that Portland is ''very profitable''. ''It would take a very large carbon price for it to be under threat.''

Nonetheless, the Labor source says the Brumby Government is almost certain to offer further support to ensure Portland does not close. ''I think the Government's view is that there are a lot of jobs there and if you can protect them and at the same time have a reasonable greenhouse outcome then you should do.''

The answer, says Peter Reefman, is to seek out new ways of powering the smelters. He supports gas as an interim measure while longer-term options such as geothermal energy are developed as a major energy source.

''If I had absolute power, if I could run the whole thing with renewables, I would,'' he says.

Reefman's proposal is supported in principle by just about everybody The Age spoke to. There is widespread doubt, however, given current levels of government and investor support, that renewables will be up to the task of powering smelters any time soon.

McAuliffe smiles politely when ''renewables'' are mentioned. He insists Alcoa wants to continue doing business in Victoria, and Portland. ''We want those facilities to survive. We want our grandkids to work there.''

He refuses to discuss future contracts other than to confirm that Alcoa is in talks with energy companies about electricity supply after 2014 and 2016, when its current electricity contracts expire.

As Victoria now has a privatised energy system, the state, theoretically, no longer has a role in such negotiations.

Alcoa denies it is seeking further state assistance. ''We go to the [electricity] marketplace; it's as simple as that,'' says McAuliffe.

Taxpayers will no doubt be nervous to discover that, in fact, the Government remains very much involved.

Despite the magnitude of the issue and its implications for the budget, jobs and the environment, both the state and federal governments refuse to discuss Alcoa's future. Repeated requests over weeks for an interview with state Treasurer John Lenders were refused. Ditto federal climate change ministers Penny Wong and Greg Combet.

The State Government does, however, acknowledge it is in ''commercially sensitive'' negotiations with Alcoa about the electricity contracts.

Those words, combined with these from Tim McAuliffe, are ominous for taxpayers, and the environment: ''We need long-term contracts, and long-term contracts in Victoria mean power from coal.''